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One of the more striking features of UK tax law as it applies to cross-border structures is the pay-first mechanism. When HMRC issues a charging notice under the profit diversion rules, the tax is due within 30 days. There is no right to delay payment while an appeal is heard. The business pays, and disputes the charge afterwards. That is a deliberate feature of the legislation, designed to shift both the financial pressure and the burden of proof onto the taxpayer from the moment the charge is raised.
For many years this operated as Diverted Profits Tax, levied at 31 percent. The Finance (No. 2) Act 2025-26 replaces DPT as a standalone tax with a new corporation tax charging provision called Unassessed Transfer Pricing Profits, or UTPP, applying to accounting periods beginning on or after 1 January 2026. A business with a 31 December year-end entered the UTPP regime from 1 January 2026. A business with a 31 March year-end enters from 1 April 2026. Businesses with periods that straddle the transition date should take specific advice on how the change applies to them.
The rate remains 31 percent, calculated as the 25 percent main corporation tax rate plus six percentage points. The pay-first mechanism is retained. The substance test is retained. The legislative architecture has changed, and the availability of double taxation treaty protections for businesses navigating disputes is now clearer. That is a meaningful development for businesses working through a dispute, and the underlying importance of having a well-founded substance position before one arises remains.
The UTPP regime targets arrangements where a UK company has dealings with a foreign entity that lack real economic substance and are designed to reduce, eliminate, or delay UK tax liability. HMRC assesses the profits that should, in its view, have been recognised in the UK and charges them at 31 percent. For UK businesses with Irish subsidiaries, the most relevant exposure is where the Irish entity is receiving profits that reflect functions performed in the UK, risks borne by the UK parent, or assets owned by the UK parent. HMRC can assess those profits at 31 percent in addition to the Irish tax already paid.
The legislation sets out an explicit test for insufficient economic substance. Where the arrangements between a UK company and its Irish subsidiary are found to lack sufficient substance, the profits attributable to those arrangements fall within the charge. The test requires verifiable operational capacity in Ireland, meaning people with real authority and accountability, assets held and used by the Irish entity, and risks borne by the Irish entity with the financial capacity to absorb them. Documentation must have been created at the time the activities occurred, and the quality of that documentation shapes the entire position under examination.
The Finance (No. 2) Act 2025-26 removes the standalone notification requirement that applied under the previous DPT regime. For accounting periods beginning on or after 1 January 2026, there is no longer a separate notification obligation. Businesses with accounting periods beginning before that date remain subject to the previous requirements for those periods, and any gaps in the notification history for earlier years need to be identified and addressed. HMRC retains full assessment powers under the new legislation, and the 30-day payment obligation remains in place.
For businesses with well-documented transfer pricing positions and substantive Irish operations, the reform provides cleaner routes to resolving disputes if they arise. For businesses whose structures have not kept pace with the standards the legislation requires, the exposure under UTPP is as real as it was under DPT. The question worth asking now is whether the Irish structure would withstand a careful examination under the new rules, and if that question has not been asked recently and formally, it should be.